Various financial and economic analysts have projected that foreign portfolio investment as well as Nigeria's trade surplus will persist into the fourth quarter of 2024 and early 2025.
This outlook is supported by the weakening naira, which has made exports more competitive, coupled with sustained global demand for crude oil. Despite global economic uncertainties, this offers a promising trajectory for the Nigerian economy.
Nigeria's high interest rate environment has produced mixed results, stabilizing inflation and attracting foreign portfolio investment, while stifling domestic investment and export competitiveness.
According to analysts at Cowry Assets Management Limited, the improvement in Nigeria's trade surplus reflects the devaluation of the naira, which has made Nigerian exports more attractive on the global stage. Furthermore, the country's current economic diversification efforts are beginning to bear fruit, as evidenced by the growing contribution of non-oil exports to total trade. The increase in exports of agricultural and manufactured products further underlines the potential of these sectors to enhance Nigeria's foreign trade.
Looking ahead, Nigeria's export capacity is expected to grow with improved crude oil production and the planned commencement of operations at the Dangote refinery and the revitalized Port Harcourt refinery. A diversified economy, with greater emphasis on non-oil exports, will be crucial to maintaining the positive momentum of the trade surplus and strengthening Nigeria's economic resilience.
Analysts at Afrinvest (West Africa) Limited noted that Nigeria recorded trade surpluses with Africa (N5.0 trillion), the United States (N5.5 trillion), Europe (N8.5 trillion) and Oceania (37 .4 billion naira). However, the country recorded a trade deficit of N4.0 trillion with Asia. The substantial trade surpluses with the first four regions were largely due to the weakness of the naira, which made Nigeria's non-crude exports more affordable globally.
Despite these advances, significant improvements in non-oil commodity and value-added exports are needed to maximize foreign exchange inflows.
Analysts draw parallels with China's success in leveraging its currency to attract global importers, suggesting that Nigeria could achieve similar results through strategic policies and investments in export-oriented sectors.
The decision of the Central Bank of Nigeria (CBN) to maintain high interest rates has sparked mixed reactions. While high interest rates help curb inflation and stabilize monetary volatility, they also pose challenges for domestic investment and long-term economic growth.
In a recent adjustment, the CBN raised the Monetary Policy Rate (MPR) by 25 basis points to 27.50 percent, up from 27.25 percent. This decision aligns with efforts to address inflationary pressures, which reached 33.88 percent in October 2024, up from 32.7 percent in September, according to the National Statistics Office (BNE).
High interest rates have successfully attracted foreign portfolio investment (FPI). In the third quarter of 2024, Nigeria recorded $1.25 billion in capital inflows, an increase of 91.35 percent compared to the same period in 2023. However, 82.81 percent of these inflows went to the money market, as foreign investors took advantage of high-yield investments. instruments such as Treasury bills and bonds.
While these inflows increase foreign exchange reserves, they are largely speculative and offer limited benefits to the real economy. In contrast, foreign direct investment (FDI), a more stable form of capital inflow, has stagnated. FDI amounted to only $145.6 million in the third quarter of 2024, representing a marginal increase of 3.4 percent over the previous year. Analysts attribute this poor performance to high borrowing costs, inconsistent policies and infrastructure deficits.
For domestic businesses, high interest rates have made borrowing prohibitively expensive. The average credit rate for business loans ranges between 22 and 30 percent, limiting access to credit for small and medium-sized enterprises (SMEs). With SMEs accounting for more than 90 percent of Nigerian businesses and contributing almost 48 percent of GDP, this credit crunch is a major barrier to economic growth.
Data from the Manufacturers Association of Nigeria (MAN) shows that capacity utilization in the manufacturing sector decreased from 55 percent in the third quarter of 2023 to 49 percent in the third quarter of 2024. Similarly, the Private sector credit growth slowed to 4.1 percent in 2024, compared to 7.5 percent in 2023, according to CBN statistics.
The high cost of borrowing has also impacted the real estate sector, with mortgage rates rising as high as 26 percent. This has made home ownership increasingly unattainable for many Nigerians and limited property developers from financing new projects.
High interest rates have contributed to the appreciation of the naira, which rose 9 percent between the second quarter of 2023 and the fourth quarter of 2024, trading at £745 to the dollar in December 2024. While a stronger naira reduces import costs, it also makes Nigerian exports less competitive.
The Nigerian Export Promotion Council (NEPC) reported a 6.2 percent decline in non-oil export earnings in the third quarter of 2024 compared to the same period in 2023. Agricultural exports, such as cocoa and Sesame seeds were particularly affected, as they became more expensive relative to products from competing countries.
The CBN faces the complex challenge of balancing high interest rates to attract foreign capital while mitigating its adverse effects on domestic investment. Furthermore, global economic dynamics could further complicate Nigeria's position. With the US Federal Reserve now considering a rate cut in 2025, Nigeria risks losing foreign investment to developed markets.
To address these challenges, analysts recommend several measures, including: Gradual reductions in the MPR as inflation declines could make credit more accessible and stimulate investment; Improving energy, transportation and digital connectivity would reduce production costs and attract investment; Transparent and stable regulatory policies are essential to building investor confidence; Expanding local stock and bond markets could reduce dependence on short-term foreign flows, and strengthening non-oil exports through subsidies, grants and better supply chains would support economic resilience.